ACCA Chartered Tax Advisors

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small-money_Gy5E2H5OHow will the new dividend rules affect you?

Many individuals operate a business via a company and pay dividends to shareholders, rather than paying a salary, which attracts higher rates of tax and National Insurance charges. However, major changes to the taxation of dividends for individuals come into force from 6 April 2016.

What are the dividend changes?

From 6 April 2016 the “notional tax” credit will be abolished and every individual will have a tax-free dividend allowance of £5,000. Any dividends received above this threshold will be taxed on basic, higher and additional rate taxpayers at 7.5%, 32.5% and 38.1% respectively. At present basic rate taxpayers pay no tax on dividends, whilst higher rate taxpayers pay at an effective 25% and additional rate taxpayers at 30.56%.

How will this affect you?

From 6 April 2016 there will be winners and losers. A higher rate tax payer with dividend income of £5,000 or less may be better off, as they will benefit from the £5,000 dividend allowance and will no longer be paying tax at an effective 25%. Whereas taxpayers with dividends above £5,000 may be worse off.

What action should you take?

For many small company owners you should be looking at accelerating dividends into the current tax year. You can consider leaving part or the whole dividend outstanding on loan account if there is insufficient cash to fund it. You also need to be careful that taking additional dividends does not push you into a higher tax band, as this could lead to an increase in tax.

From April 2016 individuals will need to consider whether taking dividends or salary is more tax efficient.

For more information on any of the above, please do not hesitate to contact us.